Countercyclical Capital Regime: A Proposed Design and Empirical Evaluation

Abstract

Motivated by the Great Recession in 2008, countercyclical capital regimes are now being considered by financial regulators. This paper provides a methodology on structuring a countercyclical capital requirement to achieve the goal of determining, at the time of acquisition, an amount of capital sufficient to survive a plausible but worst case stress period, in essence to fully capitalize the asset at acquisition.